MarketView for February 1

Summary 

The Dow Jones industrial average and the S&P 500 indexes closed at their highest levels since June 2008 on Tuesday and looked poised for more gains after strong earnings and signs of a continuing increase within the manufacturing sector.

Data showing improved factory activity and strong results from shipping company UPS are seen as a gauge for economic activity. As a result, the numbers helped restore the faith on Wall Street that the economic recovery is alive and well and more importantly, expanding.

The rising sentiment drew in investors as fears that Egypt's turmoil could spread elsewhere lessened. Volume was above last's year’s daily average with 8.71 billion shares traded on the three major exchanges amid reports of some large scale buying from institutional investors.

The Dow closed above the technically unimportant but psychologically important 12,000 level for the first time since June 2008. Meanwhile, the S&P 500 closed above 1,300 for the first time since August 2008.

Pfizer saw its share price rise by 5.5 percent to close at $19.22 after the company’s income and revenue exceeded estimates. The company also announced a new share-repurchase program of up to $5 billion of its common stock.

United Parcel Service saw its share price close up 4.1 percent at $74.59 after the company exceeded earnings estimates, while at the same time offering guidance for record-high earnings in 2011.

Signaling improvement in economic growth, the manufacturing sector expanded at its fastest pace in nearly seven years during January, according to the Institute for Supply Management. The index's employment component rose to its highest since 1973.

The euro hit a 2-1/2 month high above $1.38, boosted by the solid global manufacturing data, as easing concerns about the euro-zone's public debt also helped the broad equity rally. Furthermore, the Street was considerably less concerned over the outcome of events in Egypt after President Hosni Mubarak, responding to huge popular protests demanding the end of his 30-year rule, said he would not seek re-election in a ballot scheduled for September.

As a result, the CBOE Volatility Index, Wall Street's fear gauge, fell nearly 10 percent, its biggest drop in over two months. NYMEX oil futures, which had risen in the past couple of days, fell 0.7 percent to $90.77 a barrel.

Investors also continued to search for Egyptian markets exposure. The Van Eck Market Vectors Egypt Index exchange-trade fund was up 5.8 percent after a 7.9 percent jump Monday. The ETF is one of the main instruments for U.S. investors seeking exposure to Egyptian markets.

Supporting the Nasdaq, Baidu shares gained 9.3 percent to $118.73 after the company exceeded fourth-quarter estimates and offered up a positive near-term outlook.

Manufacturing Resurges Along with Tinges of Inflation

The manufacturing sector grew at its fastest pace in nearly seven years in January, while an indicator of inflation rose more than expected as the recovery of the world's largest economy began to gain some solid traction.

The Institute for Supply Management's manufacturing survey released on Tuesday also showed employers were thinking about ramping up hiring, one of the weak spots of the recovery so far, and helped push U.S. stock prices to their highest since June 2008.

The ISM manufacturing index, released as U.S. corporations announced strong profits and sales, hit 60.8 in January, the highest reading since May 2004 and well above analysts' expectations. A reading above 50 indicates growth.

"All in all, the ISM report showed the trend in manufacturing output growth (and hiring) rising solidly at the beginning of 2011," economists at UBS Investment Research said in a note to clients, adding the economy was gaining speed.

The new orders component, an indicator of future growth, jumped to 67.8 from 62.0. The index's employment component reached its highest since April 1973, although that will not necessarily equate to higher levels of hiring in the near term.

The Federal Reserve has said its $600 billion bond-buying program and near-zero interest rates are still needed for an economy far from full health, especially with an unemployment rate well above 9 percent.

The prices paid component of the ISM index jumped to 81.5 from 72.5 in December and coincided with signs of rising inflation around the globe as firms ramp up production.

Inflation-sensitive Treasury debt prices added to losses after the report but inflation-protected bonds fared better. The S&P 500 stock index .SPX jumped 1.7 percent to its highest in more than two and a half years.

The improved outlook for the economy eased some worries over the government's $14 trillion debt with the cost of insuring against a default (highly unlikely) of the dollar.

Underscoring the uneven nature of the recovery, a separate report from the Commerce Department indicated that construction spending fell in December to its lowest level in more than 10 years as the housing market continues to struggle. Construction spending dropped 2.5 percent to an annual rate of $787.9 billion, its lowest since July 2000.

The manufacturing sector has expanded for the last 18 months, helping a broad recovery in corporate profits.

More than 70 percent of S&P 500 companies that have reported earnings for the last quarter have exceeded Wall Street's expectations.

United Parcel Service, seen as a barometer of the economy, on Tuesday exceeded estimates and offered up record earnings guidance for 2011.

There are signs that the recovery is spreading into the small business sector. Borrowing by small companies jumped for a fifth straight month in December, according to the Thomson Reuters/PayNet Small Business Lending Index.

Carmakers made had a strong start to 2011. General Motors reported that its January light vehicle sales rose 22 percent from a year ago, while Ford indicated that sales rose 13 percent in a sign of stirring consumer appetite for bigger purchases.